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What is Stop Loss?

When you start trading online, you will come across new and unfamiliar terms, one of which is ‘Stop Loss’ or ‘Stop Orders’. In simple terms, Stop Loss is an automatic order to buy or sell an instrument once its price reaches a specified level, commonly known as ‘the Stop Price’. The order is executed automatically, which saves you having to constantly monitor your deals. It also serves as protection from excessive losses.

Need a visual explanation?

Check out this informative video:

What are the advantages and disadvantages of Stop Loss orders?

Stop Loss orders are extremely important tools for traders. Global markets operate day and night, making it virtually impossible for a single trader to follow multiple deals on a variety of shares, commodities, currencies and indices. Some instruments are extremely volatile, and can experience huge price changes in a matter of hours, or even minutes. Stop Loss orders offer a simple solution to investors’ need to carefully monitor changes and help protect a trader’s balance.

However, experienced traders understand that Stop Loss orders are not a perfect solution. They should be used carefully, because they can also limit potential profits by effectively closing a deal too soon.

Stop Loss and Negative Balance Protection

You might have heard that one of the main advantages of Stop Loss orders is their ability to serve as protection from a ‘negative balance’, preventing your account from going into minus. This might be true with some brokers, but at iFOREX this is completely irrelevant as we offer all of our clients a legally binding Negative Balance Protection, regardless of whether they use stop orders or not. When you trade with iFOREX your account will never go into minus.

Stop Loss vs. Take Profit Orders

Now that we’ve explained what a Stop Loss is, it’s time to look at a similar tool called ‘Take Profit’. A Take Profit order allows investors to set a profit limit in which the deal closes automatically, once the price of the instrument reaches the specified rate. This tool has similar advantages to Stop Loss: It allows for better control over the account, management of multiple deals and a ‘lock’ of profits once the price of an instrument reaches a specific level. However, it also has the same disadvantage: It limits potential profits, so it should be used carefully.

Can you set both a Stop Loss order and a Take Profit order on the same deal? Of course you can.

How to set up a Stop Loss order

Setting a Stop Loss order is very easy. When you open a deal, you will see an option to ‘Add Stop Loss’. Simply choose an amount (meaning, the amount you are willing to lose on the specific deal), or, alternatively, set an exact rate (the rate in which the deal will automatically close). You can also choose to add a Take Profit order.

The real challenge with Stop Loss (and with Take Profit) is figuring out which rate to set, but with a bit of practice, you will discover these automatic orders become extremely useful.

The bottom line

The ultimate goal for online traders is to take advantage of price changes in order to profit. By carefully using Stop Loss and Take Profit orders, you can gain better control over your deals and funds, and can both minimize risks and maximize your profit potential.

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